The Mila Mess: Finding Out What's Wrong with Mercado Integrado Latinoamericano

There might be no greater example of how potential represents a double-edged sword than Marcus Dupree.

At the age of 17, Dupree stood 6 feet 3 inches, weighed 230 pounds, ran the 100-yard dash in 9.5 seconds, and could bench press 400 pounds in sets of 10. He was a physical specimen that seemed built to dominate football.

Dupree, a running back, scored 87 touchdowns in his four years at Philadelphia High School in Philadelphia, Miss., breaking the national record for total touchdowns previously held by Herschel Walker, who would go on to win the prestigious Heisman Trophy, awarded annually to the best player in college football.

Courted by nearly every major college program, Dupree landed at the University of Oklahoma. His success continued into his freshman year, rushing for 1,393 yards and 12 touchdowns. 

Dupree’s future, it seemed, was bright. There was no doubt his name would be remembered among the all-time greats of the sport. And then it all came crashing down.

As documented in “The Best That Never Was,” part of ESPN’s “30 for 30” documentary series, a combination of injuries and bad advice led to Dupree’s downfall. In his sophomore season, Dupree played in only five games before withdrawing from Oklahoma. 

He would go on to play only four years of professional football—two in the now-defunct United States Football League and two in the National Football League—and rush for a career total of 1,004 yards and 11 touchdowns. Dupree stands as a reminder that potential means nothing if not properly executed. 

Numbers Don’t Lie

And here, too, stands Mercado Integrado Latinoamericano (Mila), an integration of Chile’s Bolsa de Comercio de Santiago (BCS), Colombia’s Bolsa de Valores de Colombia (BVC), Mexico’s Bolsa Mexicana de Valores (BMV) and Peru’s Bolsa de Valores de Lima (BVL), conceived with the goal of developing the capital markets in the four countries. While it might seem like hyperbole to compare Mila to a person who was considered at one point one of the best high school running backs in the country, the numbers don’t lie. 

The potential for Mila to be a regional powerhouse is there. With the addition of BMV in December 2014, Mila holds a total market capitalization of approximately $828 billion, as of August, more than the region’s largest exchange, Brazil’s BM&FBovespa, which has a market cap of roughly $543 billion, as of Sept. 18. However, for a variety of reasons, Mila’s volumes have been disappointing. As of August, only 13,441 trades had been routed through Mila for approximately $387 million since its inception on May 30, 2011. 

“I think the idea is good,” says Hugo Rubio, executive director of equity trading at BTG Pactual Chile. “But the implementation is pretty bad.”

Issues Abound

A large part of Mila is based around the Pacific Alliance, a trade bloc between Chile, Colombia, Peru and Mexico. Mila is about the integration of the countries’ exchanges so that investors and brokers can buy and sell shares from the four stock markets through their local brokers. 

From the start, technology was a focal point of the integration, which initially just included the BVC, BCS and BVL until the BMV joined in December 2014. Mila’s website proudly touts how the exchanges were brought together. “Mila is the first cross-border initiative to integrate equities markets, without any sort of merger or global corporate integration, using only technological tools along with the adaptation and standardization of the regulations on trading in capital markets and the custody of securities in the four countries,” the website states.

How integrated the markets really are is a moot point. Rubio says a lack of clarity around the rules of trading on Mila have led some to simply avoid it completely. As an example, he cited the fact that BTG Pactual’s Colombia office, which is number one in market share in the country, is not connected to Mila. In Chile, Rubio estimates he routes one order a month through Mila. 

“It’s not crystal clear for our compliance people,” Rubio says. “Who should give the order? Is it the client in Chile that is buying from Mila, or should it be the broker-dealer in Chile that is sending the order to the broker-dealer in Colombia? There are still a lot of problems in interpretation.”

Taxation is also a big issue, as each country has its own rules. Mila’s website clearly states that its goal is to not take away the exchanges’ “independence or their regulatory autonomy.” 

The four countries have tried to alleviate these issues by creating bilateral tax agreements with each other. Alonso Segura, the minister of economy and finance for Peru, noted at a recent press conference in New York that Mila countries are looking into more homogeneous and attractive treatment of capital markets participants.

But as is the case when dealing with regulations, things tend to move slowly. There is also a desire for all four countries to maintain their independence.

The settlement process has also had its issues, and is a major concern going forward, according to Anshuman Jaswal, a senior analyst at Celent. Because Mila is a trading initiative, Jaswal says there hasn’t been as much emphasis on clearing. Currently, cash and securities are not settled together on Mila, meaning the cash moves faster than the securities. By not getting delivery on payment, broker-dealers involved in trades on Mila are potentially putting themselves at much greater risk than a normal transaction, Jaswal says.

Luis Carballo, CEO of technology at BMV, says he’s not aware of any plans to create a central depository for Mila. Carballo says BMV expanded its depository to meet the needs of Mila, and it has been a relatively easy process.

Old Habits Die Hard

A lack of clarity, taxation and post-trade settlement are all reasons why an investor might be hesitant to get involved in Mila, but what might be the biggest issue for Mila’s future is firms’ desire not to change the way they currently trade.

Institutional investors just don’t have a need for Mila, according to BTG Pactual’s Rubio.

“They really don’t care about Mila. They’re not going to participate because institutional investors can buy Peru directly, buy Colombia directly and buy Chile directly. The hedge funds can buy it on swaps,” Rubio says. “For them, it’s irrelevant.”

Rubio sees Mila having more of a market among retail investors, but the Mila exchanges have consistently said this initiative will help lead to the growth of the capital markets in the region. 

BMV’s Carballo admits that there does seem to be reluctance from investors to get involved due to already having established ways of trading in all four of the countries directly. As for the new entrants in the market who might not have solidified trading routes, Carballo says Mila is too new to fully trust.

“It’s like a new toy. They’ve just begun to play with it, but they’re still not totally committed to it,” Carballo says. “They see the potential use, but it’s not in their priorities yet. But they’re beginning to be aware of it and are beginning to use it. Whenever that barrier or that line is crossed, it’s going to be much easier for it to be a certain part of their daily investment portfolio.”

Tough Times

What hasn’t helped the process is the current state of the markets in Latin American. All of the countries, whether affiliated with Mila or not, have struggled recently. As firms look to weather the tough economic storm, the last thing many are interested in is drastically changing how they trade. Adrian Landgrebe, CEO and portfolio manager for Sagil Partners, a London-based hedge fund which focuses on the Latin American markets, notes that the interest the global market had in Latin America five years ago simply isn’t there anymore. Even those in the region are looking to get out of local markets, notes Landgrebe. 

“I think the reality is that today there is an aversion toward Latin America even from the locals, who are looking at diversifying away from commodity-intensive countries,” Landgrebe says. “They are typically investing their offshore money in developed markets, primarily the US, which I think has seen a lot of the flows out of that region.”

A case in point is index provider MSCI recently announcing that it was considering downgrading Peru from an emerging market to a frontier market. While speaking at a press conference addressing reasons why Peru should remain classified as an emerging market, Peru’s Segura and Christian Laub, chairman of the Lima Stock Exchange, both addressed the importance of Mila to Peru’s future plans and the negative affect reclassifying the country would have on Mila.

“The integrated Latin American market is key,” Laub said. “If you look at Mexico, Colombia, Peru and Chile, those are the four countries in Latin America that show the strongest market favors, the strong prospects looking into the future. We want to further increase the relevance of Mila.”

Making Changes

In an effort to integrate the exchanges further, BMV’s Carballo says the countries are working on developing a single terminal where a user could trade every Mila symbol on the same platform. Carballo notes there are some vendor options for this, but they would not connect directly with the Mila platform. According to Carballo, the exchanges will likely look to build the platform on their own.

Carballo says there are also plans to offer initial public offerings (IPOs) in all four countries on Mila and add fixed-income securities. The hope is that the increase in options will lead to an uptick in volumes. 

Peru’s Segura echoed a similar sentiment at the press conference, but said the countries were still 12 to 15 months away from even developing an agreement on how to launch the new platform. 

Celent’s Jaswal says adding fixed income could be a smart move as the pool of potential investors is smaller, making it more manageable, and mostly institutional. 

BTG Pactual’s Rubio isn’t as optimistic, however. Rubio cites Peru’s issues with MSCI, the inability to do a regular cross on a stock in Chile, and not being able to short stocks in Colombia or Peru as examples of more pressing issues for the exchanges.

“I think for Mila to work, first the local exchanges have to fix their own problems,” Rubio says. “Things like that have to get fixed before Mila could be a factor.”

Sagil’s Landgrebe says getting involved in Mila comes down to two factors: liquidity and cost. If routing orders through Mila promoted liquidity in any of the markets—he specifically cites Peru as being difficult—or decreased trading costs, there would be an uptick in interest.

“Ultimately, I think that the advantage that will come through will only be if somewhere along the chain someone is willing to accept a lower level of cost or through combining and getting a greater degree of synergies in these type of operations,” Langrebe says. 

People Don’t Forget

Despite all the pessimism that surrounds Mila, the opportunity for a new player to rise in the region is still there. Brazil’s BM&FBovespa, which declined to comment for this story, has long been the king of Latin America, but that doesn’t mean there isn’t room for improvement. 

Emmanuel Doe, president for trading solutions at Interactive Data, cites a conversation with some Brazilian hedge funds about their local exchange, illustrating the extent of their discontent. 

“They were all very annoyed with the tactics of the BM&FBovespa exchange. They were all saying, ‘We need to establish a consortium; we need to change these types of crazy monopolistic tendencies,’” Doe says. “The difficulty is they own the market. So no matter what these firms are like, well, there is nothing they can do. The market is there. You’ve just got to work with the market.”

And then there is the question of how badly the Mila members actually want this harmonization of exchanges to succeed. At the end of the day, would any of the exchanges be willing to put Mila ahead of themselves? 

BMV’s Carballo is adamant that all parties are fully invested, holding monthly technology meetings on Mila. He also said BMV splits its resources between internal issues and Mila. At the press conference, Peru’s Segura and BVL’s Laub were strongly supportive of Mila and how important it was to the entire country.

But as Sagil’s Landgrebe notes, investing is all about where a firm can find the greatest growth with the minimum of risk. Just because countries share a language or a coastline doesn’t mean they should be integrated.

Rubio put an even finer point on the situation.

“The reality is, people have to understand that even though it is Latin America, everybody is different. Everybody has certain ways of doing things. People have historical differences. Chile and Peru didn’t get along. They have worked together, but they don’t like each other. They had a war. That type of resentment is still there,” Rubio says. “Everybody is so nationalistic. Even though everyone speaks the same language, it’s not like they can look each other in the eye and agree on many things.” 

Salient Points

• Despite having a total market cap that exceeds Brazil's BM&FBovespa, the largest exchange in the region, Mila has reported disappointing volumes since its inception in May 2011.

• Taxation, post-trade settlement, and a lack of desire to change their current trading habits are three of the biggest issues keeping investors from routing orders through Mila.

• Mila is in the process of developing a single platform to trade all Mila symbols and is preparing to offer initial public offerings (IPOs) and fixedincome securities, but institutional investors are more interested in increased liquidity and lower trading costs.